Victory at the Texas Tax Auction: What Now?

Imagine that you just placed the winning bid at a Texas tax auction, for a home that needs some work. What do you do now? This is the big "OH CRAP!" moment when new inverstors have no idea on what they can and cannot do after placing that winning bid.

What I am trying to do is compile a step by step play book on what you should do next. I am going to go under the following presumptions (I know this is not a good idea). You, the buyer, did your homework, visited the property, and determined if it was vacant. At this point the steps below is nearly a guide to a basic purchase at the tax sale. In no way does this guide, recommend not using an attorney to verify what you should and should not do on a case by case situation.

Step 1: Pay for the property, most county constables/sheriff will give you some time after the sale on the same day to pay. There are some constables who want payment on the property before they proceed to the next property. 

Step 2: Take your papers that you receive from the constable/sheriff, and go to the property. You will want to secure any vacant properties that you win. If the property is occupied, this is when you can make contact with the residents. Either offer to extend a lease agreement (for renters), or give written notice to vacate (72 hour written notice, TX law).  If you can do a walk through of the property and try to estimate rehab costs.

Side notes for step 2: Rent the property = instant cashflow. Evictions can become costly for you, so be nice. If necessary, offer to help move the occupant out, or pay them. If the occupant is the prior owner, this would be an excellent time to try and quiet the title without suit.

Step 3 and Step 4 are interchangeable.

Step 3: Go to the Tax Assessor-Collectors office, and make sure there are not any additional taxes due that the sale did not eliminate. If there are, be prepared to pay them. This shouldn't really be any surprise if you did your due diligence. 

Step 4: Begin the process of quieting the title. Contact previous lien holders and notify them that you purchased the property at tax sale, and request release of liens. By Texas law, the only liens that are superior are certain federal and state liens. So, city code compliance liens, mortgages, and mechanics liens all are required to be released. Also, part of this process is to try and contact the previous owner and obtain a quit claim deed.

Another side note: another option to quieting the title is to wait for the redemption period to end. This can take six months or two years, depending on the use of the property by the prior owner.

Now that you have secured the property (presuming no eviction), it's time to do the following to begin the process of making money.

Step 5: Begin to work through your rehab process. If you are still in the redemption period, you should only rehab to bring the building up to code. This is important, because most cities only give you 60-90 days to return the structure to code, if purchased at the tax sale. After the redemption period, go ahead and put in the desired extras, like granite countertops, and new cabinets in the kitchen. 

Step 6: Contact a realitor, and get the numbers verified that you received during your initial analysis of the property. Get your rental figures if you intend to hold, or get comps if you want to sell. This can be important, because the figures do change over periods of time.

Step 7: List your property, either for rent or for sale. Start working your property to earn money. You should be at this step within 90 days after auction. Yes I realize this is still during the redemption period. Texas law does allow you to sell or rent a property purchased at tax sales as long as the buyer/renter is made aware of the right of redemption. Consult an attorney for your paperwork to have the correct wording that you need to make the information on redemption available.

At this point it is just like any other transaction that you may execute. Rent for x dollars, or sell the property for y dollars. Which ever your analysis say is best for you, do it. 

As a general warning, if you are unable to quiet the title prior to the end of the redemption period, you run into the option of the prior owner redeeming the property for only 25% over cost in the first year and 50% over cost during the second year. Your cost must be itemized, and necessary to bring the property up to code. 

I have seen the paperwork on a home that was redeemed, and the person had rehabbed the home to ARV standards (remold end Kitchen and Baths plus added new patio). They lost over $50,000.00 and the prior owner got a completely remodeled house.